Financial Market Affects January, 11th 2016

Like a broken record, investors continue to focus on the impact of slower economic growth and falling equity markets in China as China’s Shanghai Index fell into bear-market territory with a 20% decline.

A slowing Chinese economy also results in less demand for oil, and lower consumption of crude oil in China coupled with the current global oversupply is a recipe for lower oil prices, a weaker stock market, and a more fragile junk bond market.  Crude prices continued to fall with a decline below $30 to close at $29.70 per barrel on Friday and this is weighing on the debt of energy companies.

The Wall Street Journal is reporting that as many as one-third of all U.S. oil and gas producers could be in danger of declaring bankruptcy by the middle of 2017 if crude oil doesn’t soon rebound to at least $50 per barrel.  A number of investment banks have said crude oil could continue lower to near $20 per barrel before eventually moving higher.

Should crude oil continue on its journey toward $20 per barrel, it would continue to put a huge strain on a junk bond market that holds a substantial amount of debt from independent oil and gas companies.  The junk bond ETFs, the SPDR® Barclays High Yield Bond ETF and the iShares iBoxx High Yield Corporate Bond ETF, both traded to multi-year lows on Friday.

Historically, the junk bond market has acted like a canary in a coal mine as far as the stock market is concerned.  Declines in the junk bond market often warn of an impending selloff in the stock market.  Below is a November 2015 chart comparing junk bonds to the NASDAQ Composite (from Bloomberg).  The divergence seen between junk bonds and stocks posed a somber warning to equity investors who took a look at this.  As we now know, divergences such as these do not end well.

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In a back-loaded week of economic news, the Producer Price Index, the N.Y. Empire State Manufacturing Index, Retails Sales, Industrial Production, and Consumer Sentiment were all reported on Friday.

The Producer Price Index (PPI), which measures inflation before it reaches consumers, fell 0.2% in December after a 0.3% increase in November.  Over the past 12 months, the PPI has declined 1%.  When excluding volatile food and energy costs, the so-called Core PPI crept 0.1% higher in December.  Over the past 12 months, the Core PPI is up a miniscule 0.3%.  This absence in inflationary pressures may delay future Fed rate hikes.

The Federal Reserve Bank of New York released a disaster of a manufacturing survey for the New York Region.  The N.Y. Empire State Manufacturing Index plunged to -19.4 in January indicating manufacturing production in the region has contracted rather severely, and calls into question the health of the economy.  The index has been below zero since July and this reading is the lowest since the last recession in March 2009.

Retail Sales fell a seasonally adjusted 0.1% during December to $448.1 billion after having grown by a solid 0.4% during November.  The consensus forecast called for a +0.1% increase in sales. For the entire year, Retail Sales recorded a modest 2.1% gain, its lowest gain since 2009.

Industrial Production declined 0.4% in December compared to an expected reading of -0.2%.  The decline was attributed to cutbacks in mining and utilities.  For the fourth quarter, Industrial Production declined at a 3.4% annual rate.  Meanwhile, Capacity Utilization for December was reported at 76.5% and was lower than the consensus forecast of 76.9%.fell more than expected, declining for the third month in a row in connection with the unusually warm temperatures and low commodity prices.

The University of Michigan’s Consumer Sentiment Index rose to a greater than expected reading of 93.3 in January from 92.6 in the preliminary January reading as lower inflation lifted consumer spending plans.  The consensus had been for a reading of 92.6.  The Current Conditions sub-index dropped 3 points possibly pressured by China’s gloomy outlook.  The survey showed consumers expected the lowest wage gains in a year, but this was offset by expectations of a lower inflation rate.

Elsewhere, the Mortgage Bankers Association released their latest Mortgage Application Data for the two weeks ending January 1 showing the overall seasonally adjusted Market Composite Index increased 21.3%.  On an unadjusted basis, the Composite Index increased by 76% week over week.  The seasonally adjusted Purchase Index increased 18.0% from the prior reporting period while the Refinance Index increased 24.0%.  Overall, the refinance portion of mortgage activity increased to 55.8% of total applications from 55.4%.  The adjustable-rate mortgage segment of activity increased to 5.1% of total applications from 4.7%.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance decreased from 4.20% to 4.12%.

For the week, the FNMA 3.5% coupon bond gained 7.8 basis points to end at $104.00 while the 10-year Treasury yield decreased 7.8 basis points to end at 2.037%.  Stocks ended the week with the Dow Jones Industrial Average falling 358.37 points to end at 15,988.08.  The NASDAQ Composite Index dropped 155.22 points to close at 4,488.42, and the S&P 500 Index lost 41.70 points to close at 1,880.33.

Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has lost 8.99%, the NASDAQ Composite Index has lost 11.56%, and the S&P 500 Index has lost 8.70%.  This past week, the national average 30-year mortgage rate decreased to 3.84% from 3.94% while the 15-year mortgage rate fell to 3.12% from 3.19%.  The 5/1 ARM mortgage rate decreased to 3.05% from 3.07%.  FHA 30-year rates fell to 3.50% from 3.63% while Jumbo 30-year rates decreased to 3.68% from 3.75%.

 Mortgage Rate Forecast with Chart

For the week, the FNMA 30-year 3.5% coupon bond ($104.00, +7.8 bp) traded within a 77 basis point range between a weekly intraday high of 104.19 and a weekly intraday low of $103.42 before closing at $104.00 on Friday.

After a monthly coupon re-pricing on Monday, the bond stepped its way higher throughout the rest of the week culminating in an upward gap or “rising window” opening on Friday as panic selling gripped the stock market.  The bond then traded above resistance at the 23.6% Fibonacci retracement level located at $104.15 before pulling back.  The pull-back from Friday’s intraday high price created a “shooting star” candlestick, a potential reversal signal indicating lower prices in the near future.  Support is now located at the 200-day moving average at $103.75.

The slow stochastic oscillator is showing the bond is “overbought” and susceptible to a turn lower in price.  Unless the stock market continues to sell-off this coming week, we could see bonds pull back toward support as traders lock in some profits.  Should this happen, we could see mortgage rates edge slightly lower.

Chart:  FNMA 30-Year 3.5% Coupon Bond

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Economic Calendar – for the Week of January 18, 2016

The economic calendar provides us the latest insight into the housing sector with the release of the NAHB Housing Market Index on Tuesday; the MBA Mortgage Index, Housing Starts, and Building Permits on Wednesday; and Existing Home Sales on Friday.  Of particular interest to the markets will be the Consumer Price Index and Crude Oil Inventories reports on Wednesday and the Philadelphia Fed Manufacturing Index on Thursday.  Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

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Road Signs – We Can Have Anything We Want!

By Daniel Blanchard

We can have anything we want, if we want it bad enough, and are willing to pay the price.  That’s great news, isn’t it?  So the world is our oyster after all, right?  This is awesome!  So let’s go get what we want!

Wait.  Hold on a minute.  This sounds too good to be true, doesn’t it?  If we can have anything we want, then why don’t more of us already have what we want?  Well, after some pondering I think the real issue here is that most of us haven’t really figured out what we truly want.

You see the challenge here is that we all have been programmed to think and live our lives in a certain way by others from the moment we are born until the moment we die.  Please think about this for a moment.  We’re brought into this world and if we aren’t crying loud enough then someone slaps our little behinds to make us cry out louder.  As we grow up our parents tell us what to do and what we should want followed by our siblings telling us.  Next, our teachers, coaches, friends, and eventually our spouses and then the needs of our own children vastly influence what we should think and want.

In retrospect, combine the above influences with the bombardment of messages we get from Hollywood and Wall Street and sadly, most of us haven’t really been given a chance yet to discover who we truly are and what we truly want.

We all need to reprogram ourselves more to our own liking.  We need to find out what we truly want. After we have figured out for ourselves what we want, then we should WANT to do almost anything to get to that special place.

Now tweens, teens and parents, go learn, lead, and lay the way to a better world for all of us. Remember, we can have anything we want, if we want it bad enough, and are willing to pay the price.  And once again, thanks in advance for all that you do, and all that you will do…

Award-winning author, speaker and author Dan Blanchard wants to you to get what you really want. For more secrets to success be sure to visit Dan’s website at: http://www.GranddaddysSecrets.com.

Financial Market Affects December 28, 2015

This past week continued to be characterized by lower trading volumes heading into the New Year’s celebration and holiday on Friday.  The financial markets continued to trade in tandem with crude oil.  As the crude oil market goes, so apparently does the stock market and indirectly, the bond market.  While the stock market tends to trade in the same direction as crude oil, the bond market has recently been trading in the opposite direction, so a drop in oil prices lends support for the bond market.

On Monday, crude oil prices were a negative for stocks as West Texas Intermediate fell 3.39% to trade below $37 per barrel at $36.81.  The bond market benefited from the weakness in stocks to post moderate gains.

Tuesday, the stock market continued to trade in tandem with oil.  Crude oil bounced 2.93% higher to $37.89 per barrel and global stock markets rose right along with it to the detriment of the bond market.

In housing, the Case-Shiller 20-City Index for October increased by 5.5% year-over-year in October, just beating the consensus forecast for 5.4% growth.  The Index also gained 5.5% year-over-year in September.  The 10-City Index climbed 5.1% year-over-year in October.  The national index increased 5.2% year-over-year, up from an increase of 4.9% in September.  The cities recording the best year-over-year gains were Denver, Portland, and San Francisco, all with robust 10.9% increases in home prices.  Those cities in the 20-City Index faring the worst were Cleveland (-0.4%), Chicago (-0.7%), San Diego (-0.3%), and Washington, D.C. (-0.3%).

Wednesday, the bond market made a technical bounce higher as the stock market struggled once more with falling crude oil prices and perhaps a little profit taking.  Crude oil prices fell after the Energy Information Administration (EIA) reported Crude Oil Inventories increased by 2.6 million barrels in the latest week, compared with analysts’ expectations for a drawdown of 1.0 million barrels.  The build in oil inventory maintained a total crude oil inventory of 487.4 million barrels, near an 80 year high.

Furthermore, the National Association of Realtors’ (NAR) reported Pending Home Sales fell 0.9% month-over-month in November while the consensus forecast had been calling for a slight increase to 0.5%.  The November reading is up 2.7% year-over-year.  The NAR is forecasting Existing Home Sales to close 2015 at about 5.25 million with the national median home price expected close to $220,700.

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Thursday marked the final trading day of the year and the stock market was subjected to disappointing economic news and saw some last minute selling.  For once, the crude oil market wasn’t the culprit for the weakness seen in stocks as oil moved 2.30% higher to reach $37.30 per barrel.  The bond market posted a moderate advance while stocks struggled.

For the week, the FNMA 3.5% coupon bond gained 23.5 basis points to end at $103.19 while the 10-year Treasury yield increased 2.7 basis points to end at 2.27%.  Stocks ended the week with the Dow Jones Industrial Average falling 127.14 points to end at 17,425.03.  The NASDAQ Composite Index dropped 41.08 points to close at 5,007.41, and the S&P 500 Index lost 17.04 points to close at 2,060.99.

Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has lost 2.28%, the NASDAQ Composite Index has gained 5.42%, and the S&P 500 Index has lost 0.73%.  This past week, the national average 30-year mortgage rate decreased to 4.09% from 4.10% while the 15-year mortgage rate fell to 3.28% from 3.30%.  The 5/1 ARM mortgage rate increased to 3.03% from 3.00%.  FHA 30-year rates remained unchanged at 3.75% while Jumbo 30-year rates decreased to 3.92% from 3.93%.

Mortgage Rate Forecast with Chart

For the week, the FNMA 30-year 3.5% coupon bond ($103.19, +23.5 bp) traded within a narrower 47 basis point range between a weekly intraday high of 103.22 and a weekly intraday low of $102.75 before closing at $103.19 on Thursday.

The bond rang in the New Year by gapping higher at the Open on Thursday in a “rising window” that should provide some short-term technical support.  Thursday’s trading action propelled the bond above the 38.2% Fibonacci retracement level at $103.16 and also provided a challenge to resistance at the 25-day moving average at $103.22.  The slow stochastic oscillator is showing a new buy signal and remains “oversold,” so if the stock market continues to struggle next week we could see a continuing move higher in mortgage bonds with a slight improvement in mortgage rates.

Chart:  FNMA 30-Year 3.5% Coupon Bond

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Economic Calendar – for the Week of January 4, 2016

The economic calendar provides us with the latest reading on the labor market with the ADP Employment Change report for December on Wednesday and the Labor Department’s December Employment Situation Summary highlighted by Nonfarm Payrolls, the Unemployment Rate, and weekly Hourly Earnings on Friday.  Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

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Road Signs – A force awakened: why so many find meaning in Star Wars

BY Patti McCarthy, Visiting Assistant Professor, Department of English/Film Studies, University of the Pacific

After witnessing the overwhelming popularity of Star Wars, director Francis Ford Coppola told George Lucas he should start his own religion.

Lucas laughed him off, but Coppola may have been onto something.

Indeed, the Star Wars saga taps into the very storytelling devices that have structured myths and religious tales for centuries.  And with every new film, fans are able to reinforce their unique communities in a world that has grown, in many ways, increasingly isolated.

A universal hero

Lucas freely admits he based his Star Wars epic on the “hero’s quest” that mythologist Joseph Campbell, in his 1949 book Hero with a Thousand Faces, argued underscores many myths and religious tales.

According to Campbell, hero quests have similar trajectories: the hero leaves his ordinary world and ventures to a place of supernatural wonders.  He faces a series of trials to prove his mettle, survives a supreme ordeal, is granted some sort of boon or treasure and returns home to share his knowledge or treasure with those he left behind.

Following this formula, Lucas substituted his own characters for the heroes, villains, and saviors of earlier hero quests.

Take Star Wars: Episode IV – A New Hope: the hero (Luke Skywalker) leaves his ordinary world (Tatooine) after receiving “a call to adventure” (Princess Leia’s hologram message) and learns he has the special talents of a Jedi.  A supportive mentor (Obi Wan Kenobi) offers supernatural aid (light saber) and guidance.  Then Luke faces a series of trials to prove his mettle (storm troopers, Jabba the Hutt), survives a supreme ordeal (Death Star, Darth Vader) and returns home wiser and victorious.

According to Lucas:

I became fascinated with how culture is transmitted through fairy tales and myth.  Fairy tales are about how people learn about good and evil…it’s the most intimate struggle that we cope with – trying to do the right thing and what’s expected of us by society, by our peers, and in our hearts.

These stories typically appear during times of doubt and can help viewers reclaim the goodness and innocence in themselves, reminding them they can overcome the evil they see in the world.  When Lucas set out to create Star Wars – against the backdrop of Vietnam, Watergate and the assassinations of the Kennedy brothers and Martin Luther King, Jr – he had his work cut out for him.

Lucas acknowledges he wrote Star Wars because he believed our society was in dire need of fairy tales, myth and fantasy – a “new myth” would provide a “New Hope” for an audience that had grown cynical and demoralized.

Today’s anxieties are just as acute.  Exhausted by the wars in the Middle East, faced with global terrorism and beset with economic woes, the American people yearn for a mythic narrative that will reaffirm their view of the world, with a traditional American hero who will triumph over evil and ensure “everything will turn out okay.”

Looking into the mirror

Lucas is sometimes accused of promoting escapism.  But he’s actually tapping into some key facets of the human condition.  After all, it’s in the telling of mythic or religious stories that we attempt to answer fundamental questions like “Who am I?” and, ultimately, “What does it all mean?”

It’s no wonder, then, that in an increasingly secularized society, many find themselves gazing away from the pulpit, instead finding meaning in the stories playing out on screens in living rooms and movie theaters across the country.

Film is sometimes described as a “dream screen” – a mirror, when held in front of an audience, reflects both the personal and collective subconscious of our culture.  It’s a place where all our hopes, fears and desires find expression.

Considering Star Wars’ mythic foundation, it’s not surprising that it packs such a powerful, emotional punch, stirring the hearts of passionate fans yearning to see the next chapter of the Star Wars universe.

Myths are about creating meaning, reinforcing connections between the I and Thou, and mending the rift between the sacred and profane.  They give us heroes we can identify with, who allow us to eventually realize that divinity is not outside the self, but within. In the beginning, Luke might be the character you wanted to pretend to be.  With time “playing Luke” helps you become the person you always wanted to be.

Transcending the screen

If all roads of the hero’s journey lead inward, then film, as a shared cultural artifact, begs us to take the first step.

Unlike a simple, standalone artifact (such as a piece of pottery), film is a shared experience. For the audience, the story, its characters and unique props (like the lightsaber) become stored in an emotional and psychological cache.  Filed into memory, they become part of the viewer’s personal history and identity.

Rather than Star Wars existing as something outside of viewers, it takes root within.  Many were exposed to the Star Wars films as children.  Some acted out scenes at home and at school, investing time and creative energy into a fictional universe and characters who became like an extended family.  For them, their “best birthday ever” became indistinguishable from the experience of playing with friends, the cutting of the cake – and their new Star Wars action figures.

In this way, Star Wars no longer remains just a film; it becomes much more.

Even subtle challenges to a narrative we’ve created about the world and ourselves can be stressful.  In response, we’re prone to cling even more tightly to our beliefs.

For this reason, minor changes in the Star Wars narrative can unnerve fans.  Denying that Han Solo shot first is like finding out you’re adopted; it’s akin to changing your fundamental understanding of the truth.

Forging connections to the past

Star Wars has further transcended the screen in the form of t-shirts, action figures, theme parks, and in cosplay and fan fiction.

As powerful as any holy relic (which, among believers, can provide affirmation and emotional support), buying and collecting Star Wars merchandise can trigger memories of the past. Accessing positive memories and tapping into nostalgia have been shown to be a critical component of forming a meaningful personal narrative, and the simple act of picking up a toy light saber can return fans to childhood, to a time when they felt happy and secure.

Even if someone didn’t have the rosiest childhood, he or she can still escape to the Star Wars universe, creating an alternate reality where cherished friends, caring mentors and happily-ever-afters await.

Situated in an advertising and media landscape that often overpromises and under delivers (“Buy this and you will be happy”), the world of Star Wars helps fans create meaning when they might otherwise be unfulfilled.

Cosplaying for community

Watching a Star Wars film or buying Star Wars memorabilia doesn’t only remind us of the “good old days.”  It serves a more meaningful purpose: it builds community in a world that has grown increasingly isolated, that has traded the physical for the virtual.

If the decline of social capital in public life (which includes religion) is partially responsible for this phenomenon, the rise of technology is equally at fault.

Even when surrounded by people, our attention is diverted – we are distracted, disembodied, absent – existing everywhere but in the present.  The connections made through social media are often frayed, and can even lead to heightened feelings of isolation or loneliness.

On the other hand, Star Wars, via play – whether it’s cosplay or swinging a light saber with a friend – demands social interaction, communication and engagement. (Some theorists have even argued that play served as the seed from which all human culture, including religion, evolved.)

Waiting in line for days to buy tickets, wearing your favorite Star Wars t-shirt to school and dressing up as your favorite character at a convention are all social touchstones – icebreakers that facilitate a sense of community and belonging.

It is in this shared storytelling space where history lives and meaning dwells.  As cultural critic Lewis Hyde writes, meaningful stories can induce a “moment of grace, a communion, a period during which we too know the hidden coherence of our being and feel the fullness of our lives.”

Once upon a time, we gathered around fires to tell stories.  Today we assemble in movie theaters to watch with wonder and awe the flicker of our stories on the screen.

Star Wars is, of course, different from religion in a number of ways.  But it still allows us to transcend the everyday and enter a sacred realm – a place where we can glimpse the Holy Land of our better selves and become the heroes we want to be.

 

Financial Market Affects November 9, 2015

There was continuing turmoil in the financial markets this past week generated from the better than forecast employment numbers in the October Employment Situation Summary released on November 6.  There is growing sentiment that the Federal Reserve will act to raise interest rates on December 16 for the first time in a decade due to the better employment data.

There is little doubt now that the Fed will pull the trigger on a 0.25% rate hike unless the next jobs report, due out on December 4, is a complete downside disaster.  The 30-day Fed Funds Futures are currently showing a 70% probability for a December rate hike, a 74% probability for a January rate hike, and a 33.1% probability for a second rate hike in March.

This past Friday, U.S. Treasuries and mortgage bonds rallied on weak U.S. economic data, lower crude oil prices, and a selloff in the stock market.  Retail Sales, Core Retail Sales, the Producer Price Index, and the Core Producer Price Index all missed consensus forecasts.

The Commerce Department reported Retail Sales rising just 0.1% during October after being unchanged in September.  The consensus forecast had called for Retail Sales increasing 0.3% after a previously reported 0.1% increase in September.  A surprising 0.5% decline in automobile sales led to the lower retail sales figure, suggesting there could be a slowdown in consumer spending that could reduce expectations for a stronger advance in fourth quarter economic growth.  However, the Retail Sales data is unlikely to alter expectations that the Federal Reserve will raise interest rates in December following October’s strong employment report.

Additionally, the Labor Department reported the Producer Price Index (PPI), a measure of wholesale costs, fell -0.4% in October when the consensus forecast had been for a +0.1% increase.  The PPI has now been either flat or lower for four consecutive months leading to a record 1.6% decline over the past year.

When excluding the volatile categories of food, energy and trade, the Core PPI declined by a smaller -0.3% but well below the consensus forecast of +0.1%.  It seems inflationary pressure at the wholesale level within the U.S. economy is difficult to find, but the Fed sounds ready to raise interest rates anyway as early as December 16 because they expect inflation to accelerate when the effects of cheaper gas prices and a strong dollar decline.

In housing, the Mortgage Bankers Association released their latest Mortgage Application Data for the week ending November 6 showing the overall Index fell 1.3%.  The Refinance Index dropped 2.0% from the prior week, while the seasonally adjusted Purchase Index increased by 0.1% from a week earlier.  Overall, the refinance portion of mortgage activity increased to 59.8% of total applications from 59.7%.  The adjustable-rate mortgage segment of activity decreased to 6.6% of total applications from 6.7% the prior week.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance rose from 4.01% to 4.12%, its highest level since August 2015.

For the week, the FNMA 3.5% coupon bond lost 10.9 basis points to end at $103.19 while the 10-year Treasury yield decreased 5.1 basis points to end at 2.27%.  Stocks ended the week with the NASDAQ Composite losing 219.24 points to close at 4,927.88.  The Dow Jones Industrial Average fell 665.09 points to end at 17,245.24, and the S&P 500 dropped 76.16 points to close at 2,023.04.

Year to date, and exclusive of any dividends, the NASDAQ Composite has declined 3.89%, the Dow Jones Industrial Average has lost 3.35%, and the S&P 500 has fallen 1.77%.  This past week, the national average 30-year mortgage rate decreased to 4.03% from 4.04% while the 15-year mortgage rate decreased to 3.24% from 3.27%.  The 5/1 ARM mortgage rate increased to 3.00% from 2.95%.  FHA 30-year rates remained unchanged at 3.75% while Jumbo 30-year rates decreased to 3.84% from 3.85%.

Mortgage Rate Forecast with Chart

For the week, the FNMA 30-year 3.5% coupon bond ($103.19, -10.9 bp) traded within a narrower 49 basis point range between a weekly intraday high of 103.30 and a weekly intraday low of $102.81 before closing at $103.19 on Friday.

The bond made a solid move higher on Friday, confirming a couple of trend reversal signals appearing last Tuesday and Thursday.  Friday’s trading action carried the bond higher for a challenge of technical resistance located at the 38.2% Fibonacci retracement level at $103.16.

The slow stochastic oscillator is continuing to gain upward momentum while still being “oversold” so there is considerable upside potential for a continuing move higher, especially if the stock market continues to falter between now and the Thanksgiving holiday as a number of market analysts are predicting.  As a result, we should see a slight improvement in mortgage rates this coming week.

Chart:  FNMA 30-Year 3.5% Coupon Bond

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Economic Calendar – for the Week of November 16

The economic calendar features a couple of manufacturing reports, the weekly Initial Jobless Claims report, and the Consumer Price Index in addition to the Fed’s FOMC Minutes from their October 28 meeting.  Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

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Road Signs – What Does A Perfect Credit Score Look Like? – Habits of High Credit Score Consumers Analyzed

By Nikitas Tsoukalis

The average credit score in the US is around 692 points.  There are many people with bad credit, whose scores can go as low as 350 points.  And then, on the other end, are those few with perfect and near perfect credit, who have scores from the high 700s to 800 or more.  One half of one percent of consumers have a perfect 850.  What distinguishes these few from the pack?

They Don’t Miss Payments. Ever.

Missing payments is the one thing that will do more damage to your credit than any other action.  People who attain and keep high scores do so, in part, by making sure that their payment history is flawless.

To keep your credit score climbing, make sure that every bill is paid on time every month.  Know how much you earn and where it goes so that a bill never surprises you.  Keep an emergency fund so that, if a bill is larger than expected, you have the funds to keep payments up to date.

They Exercise Restraint

Have you ever looked at the latest shiny electronic, a new dress, or any other thing you wanted and thought that you could just put it on a charge card and pay it off later?  This is the sort of thinking that, if done too often, can kill your credit score.  People with high credit scores never charge anything they can’t pay off in full.  They view credit as a tool they use, rather than a crutch.  On average, they only use 7% of their revolving credit.

They Have a Mix of Credit Types

Creditors want to see that you can be responsible with both revolving credit and installment loans. By having a mix that includes car loans, credit cards and a mortgage, they maximize their scores.

If you are trying to increase your score and need a new vehicle, consider getting an auto loan.  These are relatively easy to get, and they can be refinanced as your credit improves.  Pay the loan on time every month, otherwise it counts against you instead of in your favor.

They Started Early

The older the oldest entries on your credit report, the higher your record.  People with high credit scores, on average, have accounts that are 25 years old or more.

While you can’t go back and change your personal history, you can make positive changes going forward.  Many people mistakenly believe that they can raise their credit scores by closing unused accounts.  However, what this really does is shorten your available credit history.  Make sure that you keep old accounts active by using those cards on a regular basis.

We recommend charging a regular payment, such as your cell phone bill or a health club membership, to your oldest card.  Set up automatic payments so that you never forget to pay the bill. This way, you keep the card active without increasing your expenses, and, you make sure that it never goes overdue.

By emulating the people with the top credit scores, you can increase your score and get access to better opportunities.  For more information on how to help increase your scores go to www.keycreditrepair.com.

Financial Market Affects October 26, 2015

Equity investors mostly took a pause this past week from a “stocktoberfest” rally that has seen the S&P 500 Index rise by 10.3%, the Nasdaq Composite Index increase by 10.7%, and the Dow Jones Industrial Average climb 10.3% over the past four weeks.  Meanwhile, the bond market underwent a sharp two-day correction on Wednesday and Thursday following the Federal Reserve’s interest rate decision and policy statement on Wednesday.  The bond market then rebounded on Friday in reaction to disappointing economic news.

The Fed’s rate decision resulted in a Fed funds target rate of 0-0.25% as expected, but the accompanying policy statement surprised investors when it directly referenced its next meeting in December as a time when a rate hike would come into play.  The Fed also inferred the global economy is less of a concern for them than it was a couple of months ago.

The policy statement included the following: “In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and two percent inflation.”  This was a more hawkish view than was largely anticipated by investors and prompted selling in both bonds and stocks.  In reaction, the Fed Funds Futures contract showed an increase in the implied probability for a rate hike at the next FOMC meeting on December 16 to 50% from 34% prior to the statement.

There were several economic reports from the housing sector during the week.  The Commerce Department stated New Home Sales fell 11.5% to a seasonally adjusted annual rate of 468,000 units, the lowest level since November 2014.  The consensus forecast had called for a reading of 550,000 units.  Additionally, August’s New Home Sales rate was revised downward to 529,000 units from the previously reported 552,000 units.  The September decline in New Home Sales was led by a dramatic 61.8% plunge in sales in the Northeast Region.  September inventory grew to 5.8 months of supply from 4.9 months in August at the current sales pace, the highest level since July 2014.  The median new home price increased 2.7% month-over-month to $296,900 and is 13.5% higher from the same period a year ago.

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Although this report was disappointing, September housing data on existing home sales, homebuilder confidence, and housing starts was rather strong and offers a more robust picture of the housing sector.  Plus, New Home Sales, which account for only 7.8% of the housing market, tend to be more volatile on a month-to-month basis because they are obtained from a small sample.  Daniel Silver, an economist at JPMorgan, had this to say… “The September report does little to alter our view that the housing market is continuing to recover.  We view the new home sales data as unreliable and many other more reliable housing indicators have been sending upbeat signals lately.”

Also, the S&P/Case-Shiller U.S. National Home Price Index posted a slightly higher year-over-year gain with a 4.7% annual increase in August 2015 versus a 4.6% increase in July 2015.  The 10-City Composite Index increased 4.7% in the year to August compared to 4.5% in the prior month.  The 20-City Composite’s year-over-year gain was 5.1% versus 4.9% in the year to July.

Furthermore, the National Association of Realtors (NAR) Pending Home Sales Index fell 2.3% in September to a seasonally adjusted reading of 106.8, the second-lowest level of the year.  Economists had predicted a +0.6% rise in September sales.  The NAR ascribed the latest decline to a shortage of home listings having limited buyer options, particularly at the lower end of the market.  Also, stock market volatility in August, may have unsettled prospective buyers.

In mortgage news, the Mortgage Bankers Association released their latest Mortgage Application Data for the week ending October 24 showing the overall Index fell 3.5%.  The Refinance Index dropped 4.0% from the prior week, while the seasonally adjusted Purchase Index decreased by 3.0% from a week earlier.  Overall, the refinance portion of mortgage activity was unchanged at 59.5% of total applications.  The adjustable-rate mortgage segment of activity decreased to 6.6% of total applications from 6.9% the prior week.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance rose from 3.95% to 3.98%.

For the week, the FNMA 3.5% coupon bond lost 26.6 basis points to end at $104.11 while the 10-year Treasury yield increased 6.3 basis points to end at 2.15%.  Stocks ended the week with the NASDAQ Composite gaining 21.89 points to close at 5,053.75.  The Dow Jones Industrial Average increased 16.84 points to end at 17,663.54, and the S&P 500 added 4.21 points to close at 2,079.36.

Year to date, and exclusive of any dividends, the NASDAQ Composite has gained 6.29%, the Dow Jones Industrial Average has declined 0.90%, and the S&P 500 has risen 0.98%.  This past week, the national average 30-year mortgage rate increased to 3.90% from 3.83% while the 15-year mortgage rate increased to 3.19% from 3.11%.  The 5/1 ARM mortgage rate increased to 2.94% from 2.91%.  FHA 30-year rates increased to 3.75% from 3.50% while Jumbo 30-year rates increased to 3.71% from 3.62%.

Mortgage Rate Forecast with Chart

For the week, the FNMA 30-year 3.5% coupon bond ($104.11, -26.6 bp) traded within a wider 91 basis point range between a weekly intraday high of 104.69 and a weekly intraday low of $103.78 before closing at $104.11 on Friday.  Friday, the bond traded down to within 8 basis points of the low on September 25 ($103.70) before bouncing higher on weak economic news.  The upward reversal resulted in a challenge of a triple layer of technical resistance formed from the 50-day moving average at $104.07, the 200-day moving average at $104.12, and the 23.6% Fibonacci retracement level at $104.15.  If the bond can break above this layer of resistance in the coming week, we could see mortgage rates improve slightly.

Chart:  FNMA 30-Year 3.5% Coupon Bond

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Economic Calendar – for the Week of November 2

The economic calendar features several reports focusing on the labor sector highlighted by the Employment Situation Summary for October (Jobs Report) on Friday.  Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

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Road Signs – Vaccines back in the headlines – here’s what the experts say

By Jessie Schanzle, Editor, The Conversation

The Conversation is funded by the Gordon and Betty Moore Foundation, Howard Hughes Medical Institute, the Knight Foundation, Robert Wood Johnson Foundation, Alfred P Sloan Foundation and William and Flora Hewlett Foundation.

September 16th’s Republican debate put vaccines back in the headlines, when Ben Carson, a former neurosurgeon, was asked to comment on Donald Trump’s statements linking vaccinations to autism.  Carson said:

We have extremely well-documented proof that there is no autism associated with vaccinations, but it is true that we’re giving way too many in way too short a time and a lot of pediatricians recognize that.

This has sparked a flurry of reminders from physicians, scientists and others that vaccines are safe and that vaccines do not cause autism.

This is a discussion that we have covered again and again and again at The Conversation.

Yet these messages don’t seem to have counteracted misinformation about vaccines. That’s because these explanations often repeat the very falsehoods they are trying to correct.  As Norbert Schwarz and Eryn Newman from the University of Southern California write:

Media reports that intend to correct false information can have the unfortunate effect of increasing its acceptance.  Using anecdotes and images makes false information easier to imagine – and by highlighting disagreement, they distort the amount of consensus that actually exists.

A better strategy, they say, is to stick to the facts.

Kristin S Hendrix, a professor of pediatrics at the Indiana University School of Medicine, examined the research on parent-provider conversation about vaccines.  She writes:

What is clear from existing research is that respectful, tailored communications and recommendations to immunize coming directly from the health-care provider are associated with increased vaccination uptake.

Before the measles vaccine was introduced in the US in the 1960s, we thought of measles as a “mild” illness, even though it killed 400-500 Americans a year.  Today, suggesting that measles is benign is controversial.  And that is because vaccines change how we think about the disease they prevent.  As Emory historian Elena Conis writes:

Vaccines shine a spotlight on their target infections and, in time, those infections – no matter how “common” or relatively unimportant they may have seemed before – become known for their rare and serious complications and defined by the urgency of their prevention.

Marcel Salathé, now a professor at École polytechnique fédérale de Lausanne, points out everyone who can be vaccinated, should be vaccinated, to help protect those who are too young or too ill to receive the vaccine.  Tony Yang, a professor of health administration at George Mason University, looked at the impact vaccine exemption polices have on outbreaks of vaccine-preventable diseases.  And Michael Mina, an MD/PhD candidate at Emory, explained how the introduction of the measles vaccine in Europe prevented deaths from other diseases.

Speaking of other diseases, just over a year ago, news that a handful of people in the United States had contracted Ebola was dominating the headlines.  William Moss, an epidemiologist at Johns Hopkins, pointed out that Americans should worry less about Ebola and more about the measles.

Financial Market Affects October 5, 2015

Economic news was rather light this past week with few reports available to assist traders in determining market direction.  Generally, the week’s economic data favored the notion the Federal Reserve will elect to leave interests rates unchanged for the remainder of the year.

Specifically, the Commerce Department reported the nation’s Balance of Trade showed a wider trade gap for the month of August of -$48.3 billion when the consensus forecast had been for a narrower deficit of -$44.5 billion.  This was an increase of 15.6% over July’s narrower than usual deficit of -$41.8 billion.

The imbalance stemmed from a three-year low in exports, largely due to a strong U.S. dollar, while imports increased with a hefty influx of consumer electronics including $2.1 billion worth of the latest Apple iPhones and Samsung Galaxy cellphones.  This report exemplifies the U.S. economy’s weaknesses to a strong dollar and weak demand in foreign markets and could influence Federal Reserve officials to delay the timing of an interest rate hike.

Further, the Labor Department reported overall Import Prices fell -0.1%, which was better than estimates of -0.5%.  Year-over-year, Import Prices are down -10.7%.  Export Prices fell -0.7%, which was lower than the 0.2% expected.  Year-over-year, Export Prices have fallen -7.4%.  These figures suggest inflation is not yet threatening the nation’s economic recovery.  A number of traders believe the absence of inflation will make it more difficult for the Federal Reserve to rationalize an interest rate hike, especially given ongoing global economic weakness.

In housing, CoreLogic released its latest Home Price Index (HPI) showing home prices increased 1.2% in August 2015 compared with July 2015.  On a year-over-year basis, home prices nationwide, including distressed sales, increased by +6.9% in August 2015 compared with August 2014.  CoreLogic is forecasting home prices to increase by 4.3% on a year-over-year basis from August 2015 to August 2016 and remain unchanged month-over-month from August 2015 to September 2015.

In mortgage news, the Mortgage Bankers Association released their Mortgage Application Data for the week ending October 2.  Overall the Index increased 25.5%.  The Refinance Index increased 24.0% from the prior week, while the seasonally adjusted Purchase Index soared by 27.0% from a week earlier.  Overall, the refinance portion of mortgage activity decreased to 57.4% from 58.0% of total applications the previous week.  The adjustable-rate mortgage segment of activity increased to 7.6% of total applications from 6.9% the prior week.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance fell to 3.99% from 4.08% the prior week.

For the week, the FNMA 3.5% coupon bond lost 28.1 basis points to end at $104.31 while the 10-year Treasury yield gained 9.9 basis points to end at 2.09%.  Stocks ended the week with the NASDAQ Composite gaining 122.69 points to close at 4,830.47.  The Dow Jones Industrial Average increased 612.12 points to end at 17,084.49, and the S&P 500 added 63.53 points to close at 2,014.89.

Year to date, and exclusive of any dividends, the NASDAQ Composite has gained 1.95%, the Dow Jones Industrial Average has declined 4.32%, and the S&P 500 has fallen 2.18%.  The national average 30-year mortgage rate increased to 3.89% from 3.77% while the 15-year mortgage rate increased to 3.16% from 3.06%.  The 5/1 ARM mortgage rate increased to 2.95% from 2.91%.  FHA 30-year rates increased to 3.50% from 3.40% while Jumbo 30-year rates increased to 3.68% from 3.55%.

 Mortgage Rate Forecast with Chart

For the week, the FNMA 30-year 3.5% coupon bond ($104.31, -28.1 bp) traded within a narrower 42 basis point range between a weekly intraday high of 104.59 and a weekly intraday low of $104.17 before closing at $104.31 on Friday.

The week’s trading demonstrated market indecision among traders.  The bond is slowly trending lower to test support at the 200-day moving average at $104.14.  The slide lower this week is also reflected in a gradually lower trending slow stochastic oscillator that remains “overbought.”

Technical signals continue to show weakness suggesting a test of key support.  Should a breach of this support level take place, we would see slightly higher mortgage rates.  However, a bounce higher off of this support level would likely lead to marginally improved mortgage rates.

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Economic Calendar – for the Week of October 12

The economic calendar strengthens this coming week with a greater number of reports having a potential market impact.  Economic reports having the greatest potential impact on the financial markets this coming week are highlighted in bold.

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Road Signs – Chip-enabled cards may curb fraud, but consumers will be picking up the tab

By Benjamin Dean, Fellow for Internet Governance and Cyber-security, School of International and Public Affairs, Columbia University

Most of us have by now received new credit cards in the mail embedded with “EMV” (Europay-MasterCard-Visa) chips.  Merchants across the country have been hastily investing large amounts of money in new EMV-compliant terminals.

This is because October 1 marks the moment that retailers become liable for fraud that occurs in their stores if they haven’t upgraded their old credit card readers to the new payments standard – an inducement intended to hurry along the transition.

This shift is commonly thought to be speeding us toward a more secure and less fraudulent future.  But who really benefits – and who bears the costs – of this step in the transition to a cashless society is not as clear cut as it seems.

 EMV comes to America, almost

EMV is a standard for payment cards and terminals in which the data are stored on integrated circuits (the chip) rather than on a magnetic stripe.  In most countries that have adopted EMV, a personal identification number (PIN) is used to verify payment rather than a signature.  For the time being, a less-secure signature will be used in the US.  With compatible terminals, they also allow contactless payments (through so-called near-field communication), which require no authentication up to a certain monetary limit.

The technology is not new.  France was one of the earliest adopters of the standard way back in 1992 and since then, over 200 countries have joined in.  The United States has been very late to the party, but it’s finally making the switch.

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EMV adoption has swept across much of the globe, except in the US.

A key milestone in this transition is occurring today: the liability shift.

From today onward, the liability for fraud committed at the point of sale (POS) on a non-EMV compliant terminal will no longer be borne by the card issuer but, instead, by the merchant.  One estimate puts the total cost for the EMV rollout at US$8.65 billion.  The very strong financial incentive of shifted liability is why merchants are willing to adopt the terminals at such great expense.

 An imperfect security upgrade

EMV-enabled payments are supposed to reduce fraud due to certain security features.  In some countries, they do away with the signature-based method of authentication in favor of a PIN code.  The merchants do not retain the PIN entered at the point of sale by the consumer.  They use cryptographic algorithms to authenticate the cardholder and transaction.

As with any security system, EMV is a long way from perfect.  A number of different ways to hack EMV have been known for some time.

Researchers at the University of Cambridge, for example, have shown that the card-reader terminals can be hacked to accept any PIN the criminal inputs.  In a practice called ATM-skimming, thieves can install a fake PIN pad on an ATM to trick consumers into providing card information, including their PIN, which can then be used to commit fraud.

The near-field communications (NFC) feature allows card users to pay by tapping their card against a reader.  The unencrypted card number and expiration date, which emit from the chip, can be intercepted with a remote RFID device and subsequently used to commit fraud.  It’s a bit like pickpocketing in the digital age.

Given the enormous cost of this transition, and the imperfect security of EMV, we need to ask: how large are the benefits from EMV in terms of curbing fraud?

 A race to the bottom

Evidence from other countries suggests that card-present fraud (face-to-face transactions) goes down following EMV adoption, as the charts below on the UK and the Single Euro Payments Area (SEPA) show.

However, the graphs also show a “race to the bottom” as fraudsters migrate to cross-border and “card-not-present” fraud (via the internet, phone or mail), considered much easier because EMV’s security measures, like entering a PIN, don’t work online.  For an idea of the scale, in the SEPA, 66% of all fraud resulted from card-not-present payments in 2013, compared with just 46% in 2008.

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This broad pattern has been repeated in almost all developed EMV markets, including Australia and Canada.

So if EMV has proven to be an imperfect standard and merely migrates fraud from one category to another, why then push to adopt it at such an enormous cost?

 Who gains from EMV

Card issuers and banks will benefit from a likely drop in card-present fraud of 15% to 35% over the next three years if the pattern of declines in other countries following the switch holds.  Considering that such fraud was $2.2 billion in 2012, savings could be $342 million to $797 million a year.

This may be offset by the shift in fraud to card-not-present payments, which increased 40% to 100% in the three years following EMV implementation in Australia, Canada and the UK.  Such fraud in the US was $1.6 billion in 2012, so we could see anything from $624 million to $1.6 billion more in the next few years.  Given that the fraud is simply reallocated from card-present transactions though, a lower-bound estimate of $624 million is the more likely outcome.

Who will pay the price for this increased card-not-present fraud?  The onus is on the card issuer or bank to prove that the merchant did not take the necessary measures to secure the transaction.

But to meet this standard, merchants will have to implement an additional layer of security, at an indirect cost to sales, provided by the payment service providers, called a 3D Secure protocol program.  If a fraudulent card-not-present transaction gets through that, the issuer or bank carries the liability.

For all the billions of dollars in additional security investment, overall fraud levels will likely remain pretty stable.  So why are we doing it?

 The fraud sideshow

A deeper look reveals an interesting aspect to the card payments industry.  For all the attention paid to rising fraud losses borne by banks, it turns out we already cover the cost, as consumers, with or without EMV.

An “interchange fee” is imposed on every transaction that takes place with a card, typically 1% to 2%, and is used to cover fraud losses, reward programs and other processing costs.  Merchants pay the fee, but typically pass it on to consumers in the form of higher prices.

A rough estimate places total interchange fee revenue at $45 billion to $90 billion in the US in 2012 (based on the $4.5 trillion in debit, credit and prepaid card transactions that year).  For comparison, total fraud, across all categories, in the US was $6.4 billion – about a tenth of the fee revenue.

So why are merchants (in effect, consumers) paying billions of dollars to shift to a new card standard when they are already forking over tens of billions to issuers and banks to cover the costs of fraud?  Add to that, the total amount of fraud following EMV basically stays the same.

It’s particularly odd, given the operating margins of MasterCard and Visa hover around 54% and 65%, respectively, suggesting they have plenty of breathing room to make this hefty investment in fraud-prevention themselves.

In other countries, interchange fees were cut to encourage merchants to adopt EMV terminals.  But thus far, this doesn’t appear to be happening in the US.  And since two companies, Visa and MasterCard, control 75% of the market, there’s little incentive for them to cut this lucrative revenue stream.

 Questions for our brave new digital world

While the convenience of technological advances like electronic payments, and security from standards like EMV, cannot be denied, it’s important that we give thought to – and are properly informed of – the price that we pay.

The upgrade to EMV and its touted benefits, including reduced fraud, are not as compelling as we’re led to believe.  In the end, the cost for this upgrade is being footed by merchants and, ultimately, consumers, through opaque fees and higher prices, while the limited benefits accrue to the card issuers and banks.

The EMV transition costs – and the interchange fee – hint at the problem of information asymmetry – banks and card issuers know more than we do – which allows one party to take advantage of the other.  This information asymmetry is typical of the complex and bewildering technical changes that, ironically, characterize the “information age.”  So when you’re at the cash register, about to slip your chip-enabled card into the new reader, think about the costs and benefits of this new technology and ask yourself: is it worth it?